Q: A few years ago I worked for a company that offered a great pension plan. I was fully vested when I left, and being in my 50’s I was looking forward to start receiving monthly benefits as soon as I became eligible. Now I’ve received a letter being offered the choice to take a one-time lump sum of money or to stay in the original pension plan. I’m frankly not sure about the long term financial health of the company. And   –although the monthly payments ‘till death sound attractive– the lump-sum is also tempting. Any advice?

A: Sure, but first a disclaimer. I’m not a financial professional, but from my HR experience here are some things I’d consider.

Don’t let your fears about the company going broke affect your decision. Even if the company falters, the health of the pension is protected by the Pension Benefit Guaranty Corporation (PBGC) which is likely to continue to pay you. Think of them as the FDIC to your savings account.

The general consensus is that most people are better off staying in the plan because most of those who take a lump-sum tend to make poor decisions According to a 2017 survey by MetLife, “one in five of those who took a buyout burned through the money in less than six years”. Even when you do everything right, it’s just harder for an individual to achieve the same return as a pension plan.

Having said that, the first step is calculating the benefit.  Then you can make some comparisons.

Let’s say for example you’re offered $100,000 lump-sum in exchange for a $550 monthly benefit, starting at age 65. That means if you take the lump-sum, in about 15 years –when you reach 80— you’ll run out of money. But if you stay in the plan, you could live another 15 years, reach 95 and have received twice as much. See?

So, usually it’s best to stay in the plan.

Specially If you’re not financially savvy or don’t want to mess with learning about taxes, interest rates and investments.  Or if you expect to outlive what a lump-sum benefit will cover (hint, most of us will).

Does it every make sense to take the lump sum?

• Yes, If you have some crippling debt, and it makes financial sense to use the buyout to pay it off.
• If you have a poor medical history and don’t anticipate a long lifespan. That way you can leave the lump sum asset to your heirs.
• When you have other sources of retirement income and can afford more risk.

Note: if you take a lump-sum be hypersensitive to the possible tax consequences. Usually a fiduciary to fiduciary transfer into a rollover IRA is a good option, but check with your financial expert. Lastly, please do your own research and make sure you keep your address updated with past employers.

Source: Kiplinger.com, Fidelity.com   Calculate your lifespan with an online calculator.

©Copyright Eva Del Rio

Eva Del Rio is creator of HR Box™ – tools for small businesses and startups. Send questions to Eva@evadelrio.com